McDonnell's Search for Foreign Partners Upsets Many in Congress

McDonnell Douglas is headed into a storm of controversy in Congress over its effort to sign up foreign investors for its commercial aircraft business, which a number of aerospace experts say would mark a major setback to a critical U.S. industry.

"It is a very negative development for the United States," Rep. Richard A. Gephardt (D-Mo.), the House majority leader, said in an interview Friday. Gephardt, along with other members of Congress, say McDonnell's plan to sell a 40% stake in its commercial aircraft business for $2 billion amounts to a cheap giveaway of U.S. technology and market position.

Sen. Jeff Bingaman (D-N.M.) said he is seeking to have the Treasury Department investigate the potential deal, and he would want it blocked if it is judged harmful to U.S. strategic interests. In addition, both Bingaman and Gephardt said the sale will almost certainly be the focus of congressional hearings in coming weeks.

It is doubtful, however, that the administration, through its Committee on Foreign Investment in the United States, could or would be inclined to block the transaction, experts say.

Douglas President Robert Hood said his firm does not have a signed deal, but it is negotiating with Taiwan Aerospace. McDonnell rejected the congressional criticism, saying that a deal would allow it to remain financially strong and continue to produce aircraft in the United States.

Taiwan Aerospace, first identified last month as the leading contender for a McDonnell partnership, is a newly formed venture of six industrial firms. McDonnell said it is also talking with firms in Japan, South Korea, Singapore and Indonesia.

McDonnell has lacked the financial muscle to build a modern lineup of aircraft and has suffered significant loss of market share in recent years. This year, Airbus Industrie, the European consortium, has captured 28% of worldwide orders, versus a weak 10% for McDonnell.

Critics say the McDonnell deal would damage U.S. leadership in the industry, result in a loss of U.S. jobs and erode what has been one of the few bright spots in the nation's balance of trade.

"For all our investment in this industry to be sold at what is really peanuts is really a poor return," said Clyde V. Prestowitz Jr., president of the Economic Strategy Institute in Washington and a leading trade authority.

Hood said in an interview that very little technology would be transferred to or from any foreign manufacturers, even though McDonnell's next aircraft, the MD-12, will have 70% foreign content.

Hood said McDonnell is unable to afford the MD-12's estimated $4-billion development cost. A $2-billion investment for 40% of the commercial aircraft programs at Douglas is just the down payment for what is expected to be substantial additional investments, added company spokesman Michael Burch.

"We haven't found any one in the U.S. willing to come up with that kind of money," said Burch.

Asked if he anticipates a controversy over the sale, Hood said, "I can't think of any reasons why. We are all thinking about this (industry) on a global basis. I don't think we are first in doing this in any way."

Wall Street cheered the move this week and sharply bid up McDonnell shares, though they closed Friday at $74.75, down $2.25 per share.

Some analysts worry about the long-term effect, saying the McDonnell deal marks a departure from past international arrangements. For the first time, they say, foreign investors would be buying into not only a specific aircraft program but into an existing business, its technology and a manufacturing plant.

"These are the seeds of destruction for the U.S. aerospace industry, and it is wrong," said PaineWebber analyst Jack Modzelewski. "Aircraft are the most complex pieces of machinery made on Earth, and we are the best at doing it. We should aggressively protect the commercial industry."

But Howard Rubel, an analyst at C. J. Lawrence, Morgan Grenfell, said such critics are incapable of seeing that the aerospace industry is transforming into a "world of mercantile alliances," in which the United States can remain a global leader.

Critics of the deal do not fault McDonnell Douglas, which has suffered anemic profits and a sharp decline in market share in its commercial aircraft business, in part the result of tough competition by Airbus Industrie, the government-subsidized European consortium.

Rather, they blame the U.S. government for failing over the past decade to establish a policy to support the aerospace industry, even though both European and Asian firms have long had plans to gain market share from U.S. firms. Without a broad policy, the industry has been left on its own to develop an international approach.

By selling a portion of its company to a government-owned Asian firm, McDonnell would emulate Airbus and put additional pressure on Boeing, which has a policy of not seeking government support, Boeing officials have said.

"The U.S. government has been acting like we have a God-given right to be the leader in aerospace," Prestowitz said. "So now, our industry structure is going to be determined by decisions in Brussels, Tokyo and now Taipei."

Bingaman, the senator who opposes the deal, said he would ask President Bush to have the Committee on Foreign Investment in the United States investigate the deal.